Legal Briefing: Lehman Sues JPMorgan for $5 Billion

A daily look at legal news and the business of law:

Lehman Estate v. JPMorgan

Lehman Brothers was pushed off the bankruptcy cliff in its final hours by a spiraling increase in collateral demands from the big banks that did business with it. When reviewing these transactions, bankruptcy examiner Anton Vakulas noted that perhaps Lehman had a cause of action against JPMorgan (JPM) for making excessive collateral demands. However, he didn't think the odds of success were high, given that the jury would have to believe the demands were unreasonable and, even if they were, that Lehman didn't waive any possible claim by complying with them.

Bloomberg reports that Lehman Brothers Holdings has taken the plunge and sued JPMorgan over the collateral demands. The most interesting angle of the case that could emerge at trial would be Lehman's claims that JPMorgan decided, after learning from private meetings that the Federal Reserve would not rescue Lehman, to essentially grab any assets it could before the rest went into a liquidation sale or bankruptcy estate.

Accounting Board Proposes More Accurate Bank Financial Statements

How much is a bank's loan portfolio worth today? Under current accounting rules, it's hard to know because the loans aren't recorded at present-market value. The Financial Accounting Standards Board is proposing to change that by requiring that loans be marked to market, meaning reported at "fair value," reports the Wall Street Journal. Banks are fighting the change, warning that in the current depressed real estate market, the more-accurate accounting could wipe out lots of value from their balance sheets. Of course, that argument is like telling the kid in the fable: "Don't tell anyone the emperor has no clothes on!" The emperor is naked either way -- just as the loans aren't worth their stated value, either way. Indeed, the New York Times notes that the current approach is derisively called "mark to make believe."

The banks also point out that they do report fair value currently, in the fine-print footnotes to their financial statements. Then again, if the footnote disclosure effectively conveyed the loans' value to investors, the banks would have no reason to object to having their balance sheets show the impact of the fair value accounting; it would be a matter of consistency and coherence but not a change in information conveyed. But the banks do object vigorously, which suggests they are aware that the only real function of the footnote information is to provide the banks with a basis for claiming accurate disclosure; the footnote doesn't do anything meaningful to correct the impression conveyed by their balance sheets.

The proposed rules now enter a comment period; no changes will occur before the fall.

Note to Bank Attorneys: Don't Tick Off Foreclosure Judge

The Daily Business Review reports that HSBC Bank (HBC) successfully foreclosed on a Florida condo unit before Judge Jennifer Bailey, but then revealed it had lost the note on the property. Judge Bailey ordered HSBC to post a bond in case another lender produced a note and tried to foreclose, but HSBC's lawyer ignored the bond order and sold the property in foreclosure. Judge Bailey felt contemptuously treated and not only canceled the sale, giving the homeowner back the title, but she also wiped out the homeowner's mortgage.

In addition to ignoring the judge's bond order, HSBC's attorney infuriated her by foreclosing while the homeowner was complying with a mortgage-modification plan the bank had approved. The judge noted that she wanted the attorneys practicing before her to have a clue about what was going on with each case before they appeared in her court.

And in the Business of Law...

The American Lawyer notes that the founding partner of an Ohio law firm is one of two people charged in a $60 million stock scam. The lawyer allegedly made $6 million from the fraud.

The ABA Journal reports that a disgraced ex-partner of a Minneapolis law firm faces charges of embezzling $2 million from the firm and clients.

Not everything's bigger in Texas; summer associate classes are shrinking at the state's big firms, reports Texas Lawyer.